The colorful and insightful Bill Bonner of The Daily Reckoning discusses the economic crisis, speculating on how it plays out. As always, his views are entertaining and worthwhile.
Mr. Bonner’s Views
Regarding investment goals:
… your goal as an investor is to lose less money than everyone else. He who loses least wins!
Regarding investment strategy:
Cash is king in a de-leveraging, dis-inflationary, depressing slump. The king should reign for a long time…because it will take a long time to squeeze the excess debt out of the US economy.
Regarding the length of the correction:
When the correction began we calculated that it would last 7 to 10 years. That’s how long it would take to pay down debt to ’80s levels, assuming savings rates went back to where they had been at the beginning of the ’80s.
Now, it looks like it will take longer. Maybe forever. At least, it will seem like forever.
This is partly because the feds interfered.
Mr. Bonner believes that some countries may not survive because of their orientation:
… the social welfare governments of the modern world are not equipped to deal with this challenge. They were designed for growing economies, not stagnant ones. They were all created in a period of growth — made possible by the widespread introduction of cheap fossil fuels. That period is over. Temporarily or permanently. And the dinosaurs of the growth era are unable to adapt to the colder climate of the new age of austerity.
At a minimum, the following appears to be an unavoidable truth:
Neither the Europeans’ social welfare states…nor the Americans’ welfare/warfare state…are likely to survive in their present forms.
It is hard to disagree with Mr. Bonner’s observations, although one is worth exploring further because of its investment implications.
I am in agreement with most of what Mr. Bonner says. One concern is his assumption that cash will be king. It may be, but there are good reasons to believe it may not be.
Will Cash Be King?
Whether “cash will be king” or not depends upon government actions/reactions as the crisis develops. In a world of hands-off government, Mr. Bonner’s conclusion is correct. However, for the last fifty-plus years, government behavior has been consistently activist and interventionist.
We live in a world of activist government, primarily manifested through central banking and, to a lesser extent, fiscal actions. Governments have been increasingly unwilling to allow markets to work, that is to allow markets to allocate/reallocate resources unhampered. That reluctance is especially pronounced in time of economic crisis.
Economic corrections are painful in the sense that they involve adjustments in relative pricing and asset allocations which cause temporary dislocations. Governments always prefer to avoid discomfort and implement policies to prevent markets from performing their natural function of cleansing the economy. The advantage of Keynesian economics was that it justified governmental activism to cover up economic problems. Its economic validity was questionable; its political usefulness invaluable.
A period of economic turmoil unique to anyone living today lies ahead. As conditions worsen, it is unlikely that governments will become passive, rejecting decades of activist economic policies. To do so would be to admit that every economic “truth” of the last half a century was a lie. It would also be admission that government is powerless to stop the forthcoming pain.
Regardless of economic verities, politics will rule the day. As economic conditions worsen, pressures on governments will be heard and answered. Ben Bernanke and his counterparts around the world will likely react in ways never before imagined. Economic forces, like forces of nature, will be unaffected by the trivial intentions of man. They will run their course, despite efforts to stop them.
In such an environment, it is not difficult to imagine policy responses that ensure that “cash is trash.” Whenever governments fail, that outcome is common. Inflation (or war) is the last refuge of scoundrels whether they be in South America, Zimbabwe or Weimar Germany. In these circumstances, cash becomes worthless paper, suitable only for burning as a source of heat.
Why Protection of Assets is So Difficult
This country is going to become poorer regardless of what government does or does not do. Mr. Bonner’s definition of a winner as he who loses the least is appropriate. Limiting one’s losses, however, is dependent on whether cash will be king or will be trash. That one expectation is the key to formulating an investment strategy.
Expectations regarding the future value of cash are ultimately expectation of how governments will respond as this economic crisis progresses. The conundrum for investors can be summarized simply:
- If one believes that government is going to stand aside economically and passively accept market adjustments, then cash should be a major (defensive) holding as Mr. Bonner suggests.
- If, on the other hand, one believes that the last fifty plus years of government behavior will continue, then cash is going to become less valuable. It will lose value dramatically and approach Voltaire’s intrinsic value — zero.
Governments, like tigers, do not change their stripes. Proper economic policy conflicts with the desired political policy. When that occurs, governments around the world will choose the political solution. To do otherwise would be to admit that they cannot affect economic outcomes. To do so would be to admit that government economic policy of the last 50 years was a fraud.
It is my opinion that governments will do everything they can to hide the fraud. Thus, extend and pretend will continue to be the political policy. It will continue until the economy and the currency implode.
You must make your own judgment as to the future. Whatever you decide, your investment strategy should reflect it.